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COMPANY OF THE DAY : CATERPILLAR

We recently revised our price estimate for Caterpillar to $85. This was driven by the impact of low oil prices on the company's Energy & Transportation sales, as well as the continued softness in the Resource Industries segment. In a recent note we detail the changes that we made to our model, as well as our outlook for the company going forward.

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FORECAST OF THE DAY : NUMBER OF ACTIVE EBAY USERS

eBay's active user base has been growing rapidly in recent years, and we expect it to continue growing going forward, albeit at a slower pace. The company is facing significant competition from rivals such as Amazon, but there is still significant scope to add additional users, particularly in international markets.

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RECENT ACTIVITY ON TREFIS

UL Logo
Unilever: Key Trends to Watch in 2015
  • By , 3/4/15
  • tags: UL PG CL EL KMB
  • Unilever (NYSE: UL) is one of the world’s largest consumer packaged goods companies and operates in Personal Care, Home Care, Foods, and Refreshments segments. Its market capitalization of about $125 billion is next only to that of  Procter & Gamble (NYSE: PG) in the CPG (Consumer Personal Goods) industry. Unilever’s shares have gained 8% year to date, primarily on account of a 7% uptick after the company announced mixed results for fiscal 2014 (Read: Unilever’s Revenues Decline in 2014 on Emerging Markets Slowdown, Profits Jump on Cost Savings ). In 2014, Unilever’s revenues took a hit from severe currency headwinds and a slowdown in emerging markets, resulting in a decline of 2.7% in revenues. Year on year, the revenue comparison was also negatively impacted by disposal of a number of businesses in the foods segment during 2014. On the other hand, acquisitions in the personal care segment were not large enough to have a meaningful impact on overall performance. Unilever’s bottom lines fared slightly better as operating profit expanded 6% year on year on account of cost savings, despite a decline of 20 basis points in gross margin. In view of the above, it can be surmised that the key trends that are likely to have the most impact Unilever’s performance in fiscal 2015, are: Acquisition-fueled growth in Personal Care segment Divestments in Foods business Cost savings In this report, we take a look at the each of the above trends and how they may impact Unilever’s performance. We have a price estimate of $40 for Unilever, which is about 10% lower than its current market price. See our complete analysis of Unilever here Acquisition-fueled Growth in Personal Care Segment We believe that the most important factor to watch out for in 2015 will be Unilever’s inorganic expansion strategy in the Personal Care segment. Unilever’s CEO Paul Polman has repeatedly stressed the company’s strategy of initiating acquisition-fueled expansion in the personal care business, specifically in the premium segments. However, so far the company has been slow on the draw and has made only a few minor acquisitions. Recent acquisitions include the purchase of Camay and Zest soap brands from Procter & Gamble (Read: P&G Unloads Camay and Zest Brands to Unilever ), and the British skincare brand, REN Skincare. The combined incremental revenues from the aforementioned acquisitions will be less than $300 million. In comparison, Unilever’s revenues from the Personal Care segment amounted to nearly $29 billion in 2014, putting the incremental revenue from the above acquisitions at just over 1%. Therefore, these acquisitions are relatively inconsequential additions to Unilever’s Personal Care portfolio. The lack of a groundbreaking move in Unilever’s attempts to consolidate its position in the global personal care industry has made investors restless. This is despite Mr. Polman’s specific announcement in the fourth quarter earnings call that more acquisitions in the personal care brand is one of the company’s top agendas in 2015. In light of the above, it is highly likely that Unilever will accelerate its acquisitions drive in the premium personal care segment in 2015, making it the top factor to watch out for this year. We conservatively estimate that Unilever’s share of the global skin and hair care market will expand from 10.5% in 2014 to 10.7% in 2015. Divestments in Foods Business The flip side of Unilever’s expansion in the personal care business is its growing disinterest in the Foods business. The company has been divesting components of its Foods business since as far back as 2008, and it upped the tempo in 2014. Last year, Unilever announced the sale of seven slow-growth food brands, including the Ragu, Bertolli, and Royals pasta sauce brands, and the Jack Link’s meat sauce business. It also announced that it will split its spreads business into a standalone company. (Read: Personal Care Companies Shed Weight In 2014 ) Unilever has said that it will continue “modest pruning” of its non-core brands in 2015, indicating that some more of its foods brands may be up for sale this year. Consequently, we believe that Unilever’s market share in the global Grocery market will decline from 41.2% in 2014 to 37.2% in 2015. However, the move is also paying off dividends as profitability of the Foods business improved substantially in 2014. Thanks to sale of under-performing and low margin businesses, the EBITDA margin of Unilever’s Foods segment expanded to 32.7% in 2014, compared to 25.8% in 2013. Continued disposal of more low-margin brands is expected to further improve margins of the Foods segment in 2015. We estimate that the Foods division’s EBITDA margin will expand to 37.7% in 2015, from 32.7% in 2014. Since the Foods business still accounts for over a quarter of Unilever’s total revenues, improvement in its margins will have a considerably expand the overall bottom lines as well. Cost Savings In 2014, Unilever improved its core (non-GAAP) operating margin by 40 basis points despite a decline in revenue as well as gross margin. It was able to achieve this feat by a combination of across the board price hikes and wide-ranging cost savings. The deceleration in revenues was primarily because of unfavorable currency movements, while the decline in gross margin occurred due to commodity cost inflation from higher import costs. Unilever countered these adverse macroeconomic factors by cutting overhead costs and achieving efficiencies in advertising costs. The company has stated that it expects unfavorable currency movements to persist in 2015, although commodity costs may provide a low single digit tailwind. Since price hikes can offset foreign exchange headwinds on revenues only to a limited extent, Unilever needs continue cutting costs to prevent margin erosion. Therefore, the quantum of cost savings that Unilever actually generates in cost savings and the resultant impact on bottom lines will be a closely watched factor in 2015. We forecast Unilever’s overall adjusted EBITDA margin to expand by 1 percentage point to reach 20.9% in 2015, compared to 19.9% in 2014. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    ADBE Logo
    Why Adobe Is Worth $70 Per Share
  • By , 3/4/15
  • tags: ADBE IBM MSFT ACN
  • Adobe (NASDAQ:ADBE) has successfully transformed its business from perpetual licensing to a cloud-based subscription model. Investors have given a thumbs up to this transition as indicated in the stock’s performance over the past few years. While the rise in stock price has been meteoric over the past two years, when it rallied from $38 in 2013 to over $70, its performance has faltered over the past few months. However, the stock has rallied from $70 in January to its current market price of over $77. This translates into a return of over 10% in the last month alone. While we have recently revised our price target from $62 to $70, we believe that the current market valuation of Adobe is stretched, even though the company has significantly improved its Creative Cloud (CC) offering by extending functionality to mobile developers and strengthened its digital marketing portfolio through timely launches. In this note, we will discuss the factors that justify our price estimate of Adobe. Check out our complete analysis of Adobe Growth of Addressable Market for Creative Cloud Supports Our Valuation The Creative Cloud (CC) division together with the Adobe’s packaged division makes up 62% of Adobe’s estimated value. The key drivers for this division are the average revenue per subscriber and total creative software market. While Creative products (Creative Suite and Creative Cloud) contributed nearly 45% to Adobe’s revenue in 2014, the total number of licensees for Adobe’s creative products stood at 14.7 million, according to our estimates. In 2014, Adobe added 3.45 million subscribers to its CC services, which translates into a growth rate of 140% over 2013’s 1.43 million. We estimate that the subscriber base will continue to grow at a robust 75% in 2015 and add over 2.55 million subscribers during the year. We also believe that the company is on track to add 16.39 million paying subscribers by the end of 2021. This figure represents 64% of the 25.8 million point and suite licensees, which we estimate will grow at a CAGR of 8.6%. However, to justify Adobe’s current market price, the number of subscribers will have to grow to over 18 million, which in turn will require a higher growth rate in the total addressable market (TAM). Average revenue per subscriber (ARPS) for the company consists of a blend of subscribers that have enrolled to different levels of cloud services. While access to the complete Creative Cloud suite costs $74.99 per month, access to standalone Photoshop is priced at $9.99 per month. We estimate that the blended ARPS for the company was $31.74 in 2014. The recent trend in subscriptions indicates that users are subscribing to the annual full version of Creative Cloud. The company has also reported good growth in its enterprise term licensing agreement (ETLA), which have tenure of three years. This leads us to believe that the ARPS will increase in the coming years as it converges to the sticker price of $74.99. However, since the company is adding products at lower price points, it will lower the blended ARPS for the company. We estimate that the ARPS will grow to $39 by the end of our forecast period. However, the market expects ARPS to grow at a much faster pace, which might be difficult to achieve if more products with lower price points are introduced within the cloud portfolio. Market Share in Online Marketing Cloud Adobe’s cloud marketing division is the second biggest division and makes up 17.3% of its value. Over the past few years, Adobe has built a comprehensive digital marketing platform that addresses most of the needs in digital marketing. This build up started in 2009 with the acquisition of Ominiture. Since then, the company has scaled up the functionality and product offering of its marketing platform through organic and inorganic growth. Currently, Adobe offers six products under its marketing cloud solution. The Adobe marketing cloud includes a complete set of analytics, social media optimization, consumer targeting, web experience management and cross-channel campaign management solutions. It generated around $1.2 billion in annual revenues in 2014. Having been built from the acquisition, the business has had a compounded annual growth rate (CAGR) of 83% over last five years. Well positioned in a growing market, this division is expected to witness robust growth in the coming years. Adobe is aiming to increase its revenues from cloud-based marketing solutions by expanding in new geographies and verticals.  Recently, the company has launched new data-driven marketing capability that delivers personalized mobile experience, thus supplementing its marketing cloud capabilities. According to the CEO of Adobe, Shantanu Narayen, the marketing cloud is easily a $10 billion opportunity. Currently, we project revenues from its digital marketing division to reach $3.3 billion by the end of our forecast period. However, to justify the current market price of Adobe, the company will have to rake in over $4.5 billion in revenue for marketing division. We believe that this would be a difficult feat considering the intense competition in this space from companies such as IBM, Accenture, Salesforce and Oracle. Acrobat Family Revenue To Grow Acrobat family is the third largest division and makes up ~11% of Adobe’s estimated value. In the past few quarters, revenues from this division have been on a decline, primarily due to launch of document cloud services that have subscription fee spread over the period of usage. The company has amassed over 2.17 million subscribers for document cloud service. We expect this trend to continue and forecast the subscriber base to grow to 8.83 million by the end of our forecast period. Furthermore, as this service gains momentum, we expect the ARPS to increase from $8 in 2014 to $12.7 by the end of our forecast period. Despite this growth rate, we expect revenue to grow from $768 million to $1.35 billion by 2021. Transition to Cloud Services to Negatively Impact Smaller Divisions Smaller divisions of Adobe, which include Adobe packaged software, LiveCyle software and Print & Publishing, makeup 6% of its estimated value. The adoption of Creative Cloud will negatively impact Adobe’s packaged software, while up-selling to Adobe marketing cloud will pressure LiveCyle & Connect pro revenues. We expect revenues from these divisions to decline in the future. We estimate average selling price of packaged software and LiveCycle software will decline in the future to $165 and $85,160 respectively. We also expect the number of licenses sold for both the divisions to decline. Even if these metrics were to improve for both the division, it will have little impact on our stock price valuation, since the contribution from these divisions is small. Changes To Discount Rate And Terminal Growth Rate We have increased the terminal growth rate for Adobe from 1.5% to 2.5% based on the improvement in the U.S. GDP and expected hike in interest rate in the coming quarters. Furthermore, we have lowered the discount rate from 11% to 9%. While the equity risk premium for the U.S. market has increased from 5.45% in 2013 to 5.75% in the beginning of 2015, the Fed continues to keep interest rate (and the risk free rate) at record low. We have taken these factors into consideration to calculate the new discount rate. However, we believe that the market participants are factoring in an even lower discount rate to jutify Adobe’s current market price. We currently have a  $70.43 price estimate for Adobe, which is 10% below the current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    BBY Logo
    Best Buy Ends FY 2015 On A High Note. Large Screen Televisions And Mobile Phones Drive Q4 Growth.
  • By , 3/4/15
  • tags: BBY RSH AMZN EBAY WMT
  •   Other Sources: Best Buy Q4 2015 Results – Earnings Call Transcript, Seeking Alpha Best Buy Investor Relations
    AEO Logo
    Why American Eagle Outfitters Seems A Little Overpriced
  • By , 3/4/15
  • tags: AEO ARO ANF GES
  • American Eagle Outfitters (NYSE:AEO) is one of the many casual apparel retailers in the U.S., who have struggled to drive store traffic over the last couple of years. The company’s comparable store sales declined 6% in 2013 as it made a few off-pitch fashion calls that drove customers to other relatively fashion-forward brands. This even highlighted the retailer’s weakness in the fashion segment, which continues to trouble it to date. For the first three quarters of 2014, the company’s comparable store sales declined 10%, 7% and 5%, respectively. A major part of American Eagle’s product portfolio comprises of basic logo products that no longer entice fashion conscious teenagers and young adults. Due to this, the retailer has seen a number of its customers switch to fast-fashion brands such as Zara, Forever 21 and H&M, which are currently among the best performers in the U.S. apparel market. The market itself is highly saturated and its growth has slowed down considerably over the past few years, indicating that consumers are no longer focusing as much on apparel. In fact, they have diverted their limited apparel spending to online channel, where American Eagle’s presence remains terribly weak. Keeping these factors in mind, we believe that American Eagle Outfitters is a little overpriced and  our price estimate for the company at $13.45, is over 10% below the current market price.
    EXPE Logo
    Expedia Plans To Acquire Orbitz: How Will The Various Stakeholders Be Impacted?
  • By , 3/4/15
  • tags: EXPE PCLN TRIP TZOO CTRP
  • On February 12, Expedia (NASDAQ: EXPE) announced its intention to acquire Orbitz Worldwide, the Chicago-based online travel agency (OTA) responsible for brands like Orbitz.com and Cheaptickets.com.  Expedia is to pay $12 per share in cash, generating an enterprise value fo rthe transaction of $1.6 billion. The companies, having received the go-ahead from their respective boards of directors, are still awaiting regulatory approvals. Given Expedia’s recent spate of acquisitions, the antitrust authorities may express concern over the deal. Expedia expects the deal to close by the second half of 2015, once the approvals are achieved. On January 23, Expedia acquired Travelocity for $280 million, from its parent company Sabre Corp. (Read more about the deal here ). In this article, we will discuss how the Orbitz acquisition will impact various stakeholders related to Expedia. Our  $90 price estimate for Expedia is marginally below with the current market price. See our complete coverage of Expedia Orbitz: A Brief Background Orbitz Worldwide, was founded in 2000 as a shared booking platform by a number of airlines, including Continental Airlines, Delta Air Lines, Northwest Airlines, United Airlines, and American Airlines. Since its launch, the company has undergone several ownership changes, which acted as a hindrance to its whole scale development. The company also suffered due to a lack of direction, even as the OTA industry grew around it. Additionally, internal conflicts and poor strategic decisions further stunted the growth process for the company. Though its main brand Orbitz.com, is the third largest player in the domestic U.S. market,  it is nowhere close to its rivals on a comparative basis. To add some color, for Q3 2014,  Priceline (NASDAQ: PCLN) experienced a 27% room night growth and Expedia experienced a 24% growth. Orbitz experienced a 19% growth rate and, notably, from a much smaller base. Orbitz derives 74% of its revenues from the U.S. Markets. Implications For Expedia The deal might benefit Expedia in the following ways: Orbitz currently has $12 million in gross bookings. Also, the Orbitz partner network and Orbucks loyalty programme would be beneficial for Expedia’s growth. This would propel an increased number of hotel partners on the Expedia platform and eventually a bigger scale for its operation. Orbitz strong technology team will aid in Expedia’s best practice sharing. Orbitz’s airfare search technology is one of the most advanced for combining fares across different airlines. Orbitz is more adept than Expedia at displaying results in line with consumer preferences as against those with the best payout to the booking engine. The travel market is valued at $1.3 trillion currently, and Expedia commands almost 5% of the market. If we look into the past couple of years, the forerunners in the online travel space have been growing through acquisition. The rule in the OTA space seems to be: the bigger the scale and the more diversified the offerings, the higher  the chances are of generating profitability. Expedia’s management believes that the consolidation in the online travel space will continue this year as well. (Read about Expedia’s major deals in 2014  here ). Expedia might own up to 75% of the U.S. online travel market as a result of this acquisition, according to the 2013 market shares provided by PhoCusWright. However, online travel agencies (OTAs) together account for 16% of total gross travel bookings from the U.S. Implications For The Hoteliers The partnering hotels might witness a rise of commissions which they pay to Expedia, with fewer OTAs available in the market place.   Wotif, after being acquired by Expedia in 2014, is already increasing the commissions it charges to accommodation operators from 12% to 15%. The hotels would also need to put in greater effort to attract customers to directly book from their own websites. The clout of a consolidated OTA entity will be significantly greater. Implications For The Customers Even though the acquisition might lead to Expedia gaining a significant percentage of the American online travel market,  users need not be worried. Euromonitor estimates that Expedia has 6.3% share in the global travel market, while Priceline enjoys a 4.9% market share. Expedia’s CFO Mark Okerstrom suggested that Expedia’s share would remain in single digits even post the acquisition. The travel market is flooded with smaller players, and the travel related bookings have high price elasticity of demand. This implies that if Expedia tries increasing booking prices then consumers are likely to switch to other brands. Under these circumstances, it would be difficult for Expedia to establish a conventional monopoly. Besides, Expedia has strong competitors. TripAdvisor is gearing up with its instant booking platform. Priceline is equipped with its globally largest hotel booking platform, Booking.com, to pose substantial threat to Expedia. Also, newer entrants such as Skyscanner are posting strong growth in the U.S. online travel market. In its Q4 earnings call, Priceline’s management did point out that Priceline and Expedia jointly occupy a mere 10% of the $1.3 million global travel market. This again implies Expedia’s consolidation strategy wouldn’t give it a pricing advantage given the significant scope for growth for new entrants in the market. Finally, if we consider Porter’s rules of competitive advantage, the online travel agents don’t have much of a scope of product differentiation and cost reduction is only possible to a certain extent. So, the only means of differentiation is through improved customer experience. Consequently, customers don’t lose out on any advantage by a consolidation strategy, at present. However, with this rapid momentum of consolidation, there will be fewer unique OTAs for users to choose from in the future. Additionally, the rebates on bookings might significantly decline with fewer OTA competitors remaining, to drive up rebates in cash and miles. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    SNDK Logo
    SanDisk Continues To Revamp Removable Storage Product Line, Reveals 200 GB microSD Card
  • By , 3/4/15
  • tags: SNDK AAPL GOOG SSNLF MSI
  • Over the last few years, SanDisk (NASDAQ:SNDK) has witnessed a declining revenue mix of its core offerings such as removable storage cards for smartphones, tablets, cameras and other digital media devices. The contribution of removable storage to SanDisk’s net revenues has gone down from 58% in 2011 (or $3.5 billion out of $5.7 billion) to 38% in 2014 (or $2.5 billion out of $6.6 billion). The company has made attempts to boost removable storage revenues in the long run, with a revamped product line and newer products to attract customers. SanDisk launched the iXpand flash drives for Apple devices and USB flash drives for Android-based devices in the last few months and more recently introduced flash memory cards designed for use in the automobile industry . To add to this, the company announced a capacity increase in its microSD cards from the existing 128 gigabytes (GB) to 200 GB. The card is scheduled for release in the second quarter this year.
    UL Logo
    Unilever Continues Expansion of Its Personal Care Portfolio With Acquisition of REN Skincare
  • By , 3/4/15
  • tags: UL PG CL EL
  • Unilever (NYSE: UL) announced on Monday that it has agreed to purchase the British brand, REN Skincare, for an undisclosed sum. The move furthers Unilever’s bid to strengthen its presence in the premium personal care segment, even as it moves away from the stagnating foods business. The transaction is expected to close in May 2015, subject to regulatory approvals. REN Skincare, a niche brand that specializes in natural ingredients, has pioneered a new type of high performance skincare. It had sales of $62.6 million in 2013, 70% of which were derived from 50 countries. This underscores REN’s global reach despite a relatively small scale of operations. We have a price estimate of $40 for Unilever, which is about 10% lower than its current market price. See our complete analysis of Unilever here Acquisition Unlikely to Shift The Needle Meaningfully Unilever is gradually moving away from its underperforming foods business and is planning to expand its personal care business through acquisitions. The company’s shifting priority is evident from the fact that the revenue share of its Foods unit has fallen from 35% in 2008 to 26% in 2014, while share of its Personal Care unit has grown from 28% to 37% over the same period. (Read: Personal Care Companies Shed Weight In 2014 ) As part of this strategy, Unilever recently acquired Camay and Zest soap brands from Procter & Gamble (NYSE: PG). (Read: P&G Unloads Camay and Zest Brands to Unilever ) However, REN’s revenue of $62.6 million pales in comparison to Unilever’s revenues from its personal care business, which amounted to $20.9 billion in 2014. The personal care segment is Unilever’s largest business, yet the company is struggling to revive its growth amidst a slowdown in most major emerging markets. It is going to take a far bigger acquisition for Unilever to revive its flailing personal care segment through inorganic expansion. Therefore, Unilever’s acquisition of REN Skincare is a positive but small step towards consolidation of the former’s position in the global personal care market. Investors Frustrated With Pace of Change at Unilever Unilever’s latest announcement follows reports of a survey that brought to light investors’ frustration with the pace of execution of Unilever’s strategy. Unilever’s CEO Paul Polman has repeatedly stressed his intention to move the company away from the foods business and towards the premium personal care business. However, a recent survey of 100 investors by Bernstein Research showed that many investors are frustrated with the perceived lack of momentum in executing Mr. Polman’s vision. In light of the above, it is unlikely that this minor bolt-on acquisition will be enough to appease investors’ calls for a faster shift of focus to the personal care segment. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    NEM Logo
    Two Scenarios That Could Boost Newmont's Stock Price
  • By , 3/4/15
  • tags: NEM ABX FCX SLW
  • Newmont Mining (NYSE:NEM) is one of the largest gold mining companies in the world. However, like most gold producers, the company has been adapting to an environment of low gold prices. Gold prices averaged roughly $1,266 per ounce in 2014, as compared to $1,411 per ounce in 2013. The decline in prices has primarily been due to the fall in investment demand for gold due to strengthening economic conditions, particularly in the US. Gold as an investment is often viewed as a hedge against inflation and economic weakness, and investors typically shift towards other asset classes such as equities and interest-bearing securities with an improvement in macroeconomic conditions. With improving macroeconomic conditions, the Federal Reserve is expected to raise interest rates some time this year. Expectations of an interest rate hike in 2015 have played a role in the reduction in gold prices, and we have factored in similar expectations in our model. However, this is contingent upon the pace of economic and jobs growth in the US. If macroeconomic and jobs data improves at less robust rates than expected, the Fed may delay an interest rate hike or moderate the pace of its interest rate hike cycle. This would present an upside to gold prices, which would positively impact the prospects of gold mining companies such as Newmont. Though short-term demand for gold will be influenced by expectations of an interest rate hike, long-term strength in gold demand will continue to be governed by the jewelry demand for gold, which constitutes roughly 55% of the global demand for the metal. The jewelry demand for gold is positively correlated with economic growth, particularly growth in emerging economies, which account for the bulk of the jewelry demand for gold. If economic growth picks up faster than expected, there may be a significant increase in both gold prices and the demand for the metal, which would positively impact the prospects of gold mining companies such as Newmont. In this article, we will take a look at how these possible scenarios would impact Newmont’s stock price. Delayed or Moderated Interest Rate Hike The Federal Reserve has been keeping a close eye on U.S. macroeconomic and jobs data. The Federal Reserve is expected to start its interest rate tightening cycle only if these metrics display consistent robustness. Whereas the unemployment rate fell to 5.7% in January, as compared to around 6.7% a year ago, the Fed is also looking at the pace of increase in wages. Wages have risen around 2.2% on average over the last 12 months. However, with a decline in energy prices over the past year, US inflation rates are comfortably below the Fed’s 2% target. If inflation rates remain muted or if other macroeconomic indicators falter, the Fed may push back its expected hike in interest rates. Alternatively, the Fed may choose to moderate the pace of increase in interest rates. This scenario would present an upside to gold prices. In order to model this scenario, we have factored in a 3% increase in gold prices and an increase in margins in our stock price estimate for Newmont. This increases our price estimate by around 3% from $24.82 to $25.49 and our EPS estimate for 2015 by 14%, from $1.14 to $1.30. See our analysis for the Delayed or Moderated Interest Rate Hike scenario here Increased Jewelry Demand for Gold The demand for gold can broadly be classified into demand for gold as an investment, demand for gold in industry, central bank purchases, and the demand for gold jewelry. The jewelry demand for gold is the largest component of the overall demand for gold, accounting for around 55% of the overall demand for gold. The demand for gold jewelry is strongly connected to cultural traditions in many countries, particularly in China and India. In addition, the demand for gold jewelry is aspirational, and tends to rise with increasing income levels. China and India are the two largest consumers of gold jewelry, accounting for nearly 56% of the jewelry demand for gold. The trends in gold consumption by these two countries will largely determine the trends in demand for gold jewelry. China is the world’s largest consumer of both gold and gold jewelry. Private sector demand for gold in China stood at 1,132 tons of gold in 2013, out of which the demand for gold jewelry stood at 669 tons or around 59%. This accounted for around 30% of the global jewelry demand for gold. China is characterized by robust trends in urbanization, and industrialization. These have led to rising income levels in China. As per estimates by Ernst and Young, China’s middle class population will grow to around 500 million by 2020, as compared to 150 million in 2010. These robust trends in growth in income levels are expected to result in an approximately 20% growth in Chinese private sector gold demand to 1,350 tons by 2017, as compared to demand in 2013. Jewelry demand for gold from China is expected to rise by around 17% to 780 tons in 2017. India is expected to witness trends in urbanization and growth in income levels comparable to China over the same period. As per estimates by Ernst and Young, India’s middle class population is expected to grow from 50 million in 2010 to around 200 million in 2020.  This would boost gold jewelry consumption at similar rates to those anticipated for China. However, these estimates of growth in gold consumption are contingent upon the pace of economic growth in these countries, particularly China. There are question marks about the pace of Chinese economic growth, with a slowdown in economic activity, particularly in manufacturing, dragging down the expected GDP growth rate to 6.8% and 6.3% in 2015 and 2016 respectively, from 7.4% in 2014. However, if Chinese growth recovers faster than expected, it would provide a fillip to global gold demand. In addition, Indian GDP growth is expected to pick up in 2015 and 2016, partially due to the efforts of the reforms-oriented new government. In the scenario of a faster than expected global economic recovery, driven by China and India, global demand for gold would rise at rates mentioned previously, which are higher than those currently factored into our model. In order to model this scenario, we have  factored in a 2% upside to gold prices, around 4% higher shipment volumes and a corresponding increase in margins. This would increase our price estimate by around 6% from $24.82 to $26.22 and our EPS estimate for 2015 by almost 30%, from $1.14 to $1.47. See our analysis for the Increased Jewelry Demand scenario here Thus, these two scenarios may result in changed business conditions for Newmont which would have varied impacts upon Newmont’s stock price and EPS. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    CAT Logo
    Caterpillar Revised To $85 On Oil Prices, Continued Mining Weakness
  • By , 3/4/15
  • tags: CAT DE
  • Caterpillar ’s (NYSE:CAT) revenue been suffering from a decline in its Resource Industries segment due to weak demand for machinery and equipment in the global mining sector since the end of 2012. To add to its woes, crude oil prices have declined to a level where Caterpillar’s (CAT’s) Energy and Transportation segment will feel the pinch. This is a cause for concern for the company, since Energy and Transportation was the segment that it was relying on for growth in the short term, as the company’s Construction Industries segment also took a dive in the third quarter of 2014. The strong U.S. dollar is also likely to have an impact on the company’s revenues. Given these headwinds, we have revised our price estimate for Caterpillar to $85.
    CME Logo
    CME Delivers Record Volumes For February, Driven By Interest Rate Derivatives
  • By , 3/4/15
  • tags: CME ICE NDAQ
  • Global exchange operator CME Group (NASDAQ:CME) recently reported its monthly trading metrics for the month of February. After a solid end to 2014 with high trade volumes in Q4, CME has sustained growth in its trading metrics in 2015 thus far. CME’s trade volumes in Q4 stood at 14.8 million contracts traded per day, with October volumes (17.6 million contracts per day) contributing significantly to the high quarterly average. As a result, CME witnessed a 24% annual growth in clearing and transaction fee revenues to $713 million in the December quarter. The growth spree has continued in Q1’15 thus far, with combined volumes in January and February averaging 15.7 million contracts per day, respectively, which is about 17% higher than the comparable prior year period. Interest rate derivatives and energy derivatives drove much of the growth in these two months. Below we take a look at CME’s February performance across key asset classes.
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    What Would Be The Impact Of A Restart Of Mining Operations At Bloom Lake On Cliffs' Stock Price ?
  • By , 3/4/15
  • tags: CLF RIO VALE MT
  • Cliffs Natural Resources (NYSE:CLF) has been grappling with an environment of weak iron ore prices for some time now. Iron ore prices have declined sharply over the course of the last year, with weak demand and oversupply resulting in prices declining around 47% year-over-year to $68 per dry metric ton (dmt) at the end of January. In response to the weakening pricing environment, the company idled its high-cost Bloom Lake iron ore mine in Canada at the end of December. Though it made sense for the company to idle the Bloom Lake mine, it was an unpopular decision in Quebec, resulting in the loss of around 500 jobs. The Government of Quebec was engaged in talks with the company over restarting operations at Bloom Lake in January. However, the company stuck to its guns, with operations at Bloom Lake still in the idled state. In addition, the Bloom Lake Group, the legal entity which operates the Bloom Lake mine, recently filed for bankruptcy protection. In this article, we will take a look at why it makes sense for Cliffs to keep operations at Bloom Lake firmly shut. We will look at the impact of a possible restart of the Bloom Lake mine on the stock price and EPS for Cliffs Natural Resources. See our complete analysis for Cliffs Natural Resources   Iron Ore Prices Iron ore is an important raw material for the steel industry. Thus, demand for these raw materials by the steel industry plays a major role in determining their prices. Though a majority of Cliffs’ iron ore sales are to the North American steel industry, sales agreements are benchmarked to international iron ore prices. International iron ore prices are largely determined by Chinese demand, since China is the largest consumer of iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. Chinese steel demand growth is expected to slow to 2.7% in 2015, from 6.1% and 3% in 2013 and 2014, respectively. Weak demand for steel has indirectly resulted in weak demand for iron ore. On the supply side, an expansion in production by major iron ore mining companies such as Vale, Rio Tinto, and BHP Billiton has created an oversupply situation. A combination of weak demand and oversupply is likely to result in weak iron ore prices in the near term. The worldwide surplus of seaborne iron ore supply is expected to rise to 300 million tons in 2017, from an expected surplus of 175 million tons in 2015, and a surplus of 72 million tons and 14 million tons in 2014 and 2013, respectively. In view of the persisting oversupply situation, iron ore prices will remain subdued in the near term. The Bloom Lake Mine Cliffs reports a sales margin figure for each of its iron ore mining segments, which is an indicator of the segment’s operating performance. The sales margin for the Bloom Lake mine stood at a loss of $30.13 per ton of iron ore produced in 2014.  This compares unfavorably with the company’s U.S. Iron Ore business segment, which reported a sales margin of $32.53 per ton in 2014. Cliffs’ management had stated that the then ongoing Phase I mining operations at Bloom Lake were not economically viable. With the company unable to attract equity investors for further development of Bloom Lake, it decided to idle the mine. Given the prevailing iron ore pricing environment, it was a wise decision as we will show in the following section. Impact on Cliffs had Bloom Lake been Operational The Bloom Lake mine is a part of the North American Iron Ore division in our model. Had the loss-making Bloom Lake mine been operational, it would have augmented shipments from the North American Iron Ore division, with Bloom Lake producing around 6 million tons of iron ore concentrate in 2014. However, it would have weighed on realized prices and margins for the division. Iron ore concentrate sold by Bloom Lake sells at lower prices as compared to iron ore pellets sold by the company’s US Iron Ore division. Realized prices for Bloom Lake stood at $81.19 per ton, as compared to $102.36 per ton for the US Iron Ore division. In addition, the loss-making Bloom Lake mine would have brought down margins for the whole division. In our stock price estimate to factor in the impact of a restart of operations at Bloom Lake, we will keep the company’s capital expenditure at the levels given by the company in its current guidance. If we factor in these cumulative impacts of the operation of the Bloom Lake mine on our model, our estimate of Cliffs’ stock price declines by around 57% from $7.25 to $3.09. In addition, our estimate of the company’s EPS for 2015 declines to a loss of $0.52 from our current estimate of $0.29, in which we have assumed that Cliffs keeps the Bloom Lake mine in an idled state. Looking at the drastic impact on the company’s stock price and EPS, Cliffs should certainly keep the Bloom Lake mine shut. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    China Unicom Reports Mixed 2014 Results On Slowdown In Subscriber Adds
  • By , 3/4/15
  • tags: CHU CHA CHL
  • China Unicom ‘s (NYSE:CHU) net profit rose about 16% year-over-year (y-o-y) to over RMB 12 billion ($1.92 billion) in full year 2014, on modest service revenue growth and lower costs. Mobile broadband service revenue from high-speed subscribers (3G and 4G) grew by 18% y-o-y to about RMB 106 billion ($16.9 billion) driven by a net addition of 26.5 million high speed subscribers in 2014. This increase in 3G-4G subscribers was about 40% lower than the corresponding figure in 2013 (46 million). Although the company registered robust bottom line gains, the company’s overall revenues witnessed a decline of 3.5% owing to a 30% drop in telecom product sales, partially offset by a low single-digit rise in service revenues. On the cost side, interconnection charges paid by the carrier to its peers  China Mobile (NYSE:CHL) and  China Telecom (NYSE:CHA) declined by about 28% to RMB 14.6 billion, owing to a favorable revision in interconnection fees in January last year. Mobile subsidy costs also declined by a significant 40% in 2014 to RMB 4.7 billion ($750 million), primarily because of the carrier’s increased focus on low-cost smartphones to gain subscribers. In the fixed-line business, China Unicom’s service revenue grew by 2.3% y-o-y to RMB 88.5 billion ($14.1 billion), driven by almost double-digit (9.2%) sales growth in broadband services. The total number of broadband subscribers grew 6.4% y-o-y to reach 68.8 million by the end of the year. Going forward, we expect the company to continue expanding its broadband network across the country as part of its commitment under the government’s ‘Broadband China’ plan. Our current price estimate for China Unicom is $17, which is slightly ahead of the market price.
    Wireless Tech Giant on the Cheap
  • By , 3/4/15
  • tags: SPY QCOM
  • Submitted by Wall St. Daily as part of our contributors program Wireless Tech Giant on the Cheap By Chris Worthington, Editor-in-Chief of Income   Last week, I wrote about John Chambers, the CEO of Cisco Systems ( CSCO ), and his desire to be at the forefront of the so-called Internet of Everything . Indeed, the coming wave of internet-connected devices will change the world as we know it, while minting many fortunes along the way. For investors, that means we need to find the companies that are best-positioned to capitalize on this massive trend – and it doesn’t hurt if they’re paying a reasonable dividend in the meantime, either. Lucky for us, Cisco isn’t the only well-positioned tech giant that’s trading at a discount right now . . . In fact, a second large-cap technology company is looking like a solid “Buy” – Qualcomm Incorporated ( QCOM ). Qualcomm is an American global semiconductor company that designs and markets wireless telecommunications products and services. The company is the world’s leading patent holder in advanced 3G mobile technologies. Like Cisco, Qualcomm sports a massive market cap of over $100 billion, so it’s not exactly a hidden gem. Yet even though the company is a household name, many don’t realize that it’s been rapidly increasing its dividend in recent years. In fact, the company’s five-year dividend growth is a whopping 147%. Currently, QCOM pays a $0.42 quarterly dividend, good for a yield of 2.34%. That’s higher than the S&P 500, as well as the average for S&P 500 technology companies. What’s more, the company has consistently raised its dividend every four quarters – which means its next announcement, which will likely come in April, should include a dividend hike. A Favorable Settlement Of course, in our search for income opportunities, we want to keep our focus on cheap dividend growers. Fortunately, Qualcomm is also trading at a discount right now. Check out the chart below, which compares Qualcomm to other S&P 500 technology companies: As you can see, Qualcomm is trading at a significant discount across the board – plus it has a higher dividend yield than its peers. What’s more, Qualcomm is trading at a discount to its 10-year average for all of these metrics, as well, as demonstrated in the chart below: Now, there’s one big reason why share prices are depressed at the moment: Qualcomm was facing an antitrust suit in China for allegedly overcharging customers for licensing agreements. With news that the company could face a fine of $1 billion or more – plus the potential that China could limit Qualcomm’s licensing business in the future – it’s not surprising that investors were feeling uneasy. Luckily, it seems that the cost of even the worst-case scenario has been priced into Qualcomm’s shares, which are down about 4% in the last 12 months and down about 9% since their high on July 23, 2014. Better yet, the case was just settled on February 9, and Qualcomm got off relatively easy. The company will pay $750 million to the Chinese government (which is less than the anticipated fine), and it must also forfeit a portion of royalty revenue on its 3G and 4G devices. More importantly, it won’t face any sanctions that would limit its ability to grow revenue going forward. A Sunny Outlook for Qualcomm Ultimately, Qualcomm seems well positioned for the future. For now, it’s a cash flow giant, with $7.2 billion in free cash flow in the last 12 months. In that same period, QCOM paid $2.7 billion in dividends – which leaves plenty of room for stock buybacks or a dividend hike. And going forward, Qualcomm is set to take advantage of the Internet of Things. In the latest earnings report, CEO Steve Mollenkopf noted that the company has a “broad set of products and equipment” with Qualcomm solutions inside that will be used in smart homes, smart cities, mobile healthcare, and wearables. As the trend of internet-ready devices continues to grow, Qualcomm should be riding high. In the meantime, investors can buy shares at a discount and enjoy the rapidly growing dividend. Good investing, Chris Worthington Editor’s Note: Qualcomm is the perfect example of the incredible and timely opportunities we’re hunting down each and every day. Here’s another that you’ll want to see right away. Click here to see what I mean . The post Wireless Tech Giant on the Cheap appeared first on Wall Street Daily . By Chris Worthington
    Aluminum Is Back in the Can
  • By , 3/4/15
  • tags: SPY AA
  • Submitted by Wall St. Daily as part of our contributors program Aluminum Is Back in the Can By Shelley Goldberg, Commodity Strategist   Back in the summer, life was good for the aluminum market. Prices were increasing, and the market looked healthy . . . Futures spreads were narrowing . . .   Midwest premiums were rising . . . Still, I sent out a word of caution imploring readers to look past the commodity’s sunny disposition . Namely because the combination of rising global aluminum inventories – along with slowing growth worldwide and the strengthening of the U.S. dollar – indicated that the high prices were unsustainable at the time. Now, buried under a heavy winter, prices have indeed turned sluggish. And as a world superpower reawakens after a national holiday, prices will become even more unpredictable. Mountains of Metal Create a Price Rollercoaster Part of the reason for the drop in price is the piles of aluminum inventories around the world. You can see in the chart below how the price of aluminum has trended over the last couple of years. In fact, at Vlissingen – a large port in the Netherlands notorious for storing large quantities of light metal – aluminum is stuffed into every available space. Ingots are omnipresent, in outdoor sheds, in boats, on the docks, and just sitting outside! Plus, there are another 685,000 tonnes in Rotterdam. With those storage facilities, the LME currently has a whopping 1.7 million tonnes of aluminum sitting in their registered warehouses throughout the world. But that’s not all of the aluminum that exists . . . There’s still more stored in non-registered warehouses, including in forms like processed and scrap metal. In addition, China has stepped up exports of semi-manufactured products, which attract tax rebates and could also douse Asian premiums next year. But high and rising aluminum inventories aren’t a new phenomenon. In fact, they’ve been the stigma pressuring aluminum markets for years. New Data . . .  Same Old Story Anyone who follows the metals markets knows that large banks and financial institutions are holding metal as a financing vehicle and profiting from the yield, which is well over current interest rates due to aluminum’s steeper yield curve. You see, over time . . . the stores of aluminum built up, while the queues to get it out grew longer due to warehouse rules dictating the amount that could be released. In many cases, the warehouses setting those rules are owned by the fanatical institutions holding the metal. These limitations resulted in rising Midwest premiums, even as outright futures prices dropped. As controversy arose around these deals, regulatory authorities slowly stepped up to the plate. But while regulation has helped to reduce warehouse queues, the Dodd-Frank and Volcker rule has encouraged banks to wind down prop desks. Unfortunately, this also reduces liquidity in the marketplace. Today, though, we can see a different image forming. A New Reflection Yes, aluminum prices are still drifting lower, but so is the Midwest premium, which has lost 10% of its value just over the past few weeks as delivery queues have shorted. The spot premium, measured in cents per pound, peaked at $0.24 in early February, partly due the U.S. auto revival. But the premium dropped to $0.22 this week, according to Platts . What this likely means is that reality is setting in . . .  We have a colossal amount of aluminum inventories and a surplus of producers. And this trend isn’t likely to change course any time soon, as forward deals have been booked for under $0.20 per pound. Ultimately, spreads are likely to ease further once the short rolls are finished, as those holding warrants will need to be compensated for holding on to metal through the delivery queue. And the final kicker is how much it costs to produce the common metal. The highest input cost of producing aluminum is energy, which is getting cheaper by the day. And as input costs decrease, there is a greater incentive to produce. Thus we have a serious disconnect between the two. A pure-play is to short aluminum futures, bearing in mind that when China returns from its New Year’s holiday, the markets will be sensitive to any economic data released next week. Good investing, Shelley Goldberg Editor’s Note: If you’d rather not short the aluminum market, there are a few other killer opportunities our team is tracking at the moment. This one might be my favorite right now … The post Aluminum Is Back in the Can appeared first on Wall Street Daily . By Shelley Goldberg
    Straight Talk Money: What Warren Buffett Eats for Breakfast and the Passing of a Wall Street Legend
  • By , 3/4/15
  • tags: SPY TLT
  • Submitted by Sizemore Insights as part of our contributors program Straight Talk Money: What Warren Buffett Eats for Breakfast and the Passing of a Wall Street Legend by Charles L. Sizemore, CFA Warren Buffett, 84 years old and one of the wealthiest men to have ever walked the earth, survives on a diet of Cherry Coke, ice cream, and greasy potato chips. Actually, in his own words, he adopted the diet of a six year old because the actuarial tables suggested that a six year old has the longest life expectancy. It makes my own cravings for Whataburger and Dr. Pepper seem a lot less bad. Peggy Tuck and I discuss Mr. Buffett’s diet on Straight Talk Money. Check out this link: http://charlessizemore.com/wp-content/uploads/2015/02/150227-Straight-Talk.mp3   Buffett reminds me of the father in Grumpy Old Men who subsisted on a diet of bacon and beer. We also pay tribute to a Wall Street legend that passed away this week at the age of 109. Irving Kahn was working on Wall Street when the 1929 Crash hit and was still actively investing money for clients at the age of 109. Rest in peace, Mr. Kahn. This article first appeared on Sizemore Insights as Straight Talk Money: What Warren Buffett Eats for Breakfast and the Passing of a Wall Street Legend
    Oh là là! Looking for Dividend Yield? Explore France
  • By , 3/4/15
  • tags: EWQ SPY
  • Submitted by Sizemore Insights as part of our contributors program Oh là là! Looking for Dividend Yield? Explore France by  Charles Lewis Sizemore, CFA This is scary time to be investing in Europe. With the Greek debt crisis kicked down the road for another four months and with most of the Eurozone dangerously close to slipping into deflation, investors have been parking their cash on this side of the Atlantic. But investors flocking to American shores for the perceived safety are setting themselves up for disappointment, particularly when it comes to dividends. The U.S. is one of the lowest-yielding markets in the world at today’s prices. An investment in the iShares Core S&P 500 ( IVV ) will get you a dividend yield of just 1.88%. Meanwhile, across the Atlantic, you can get a dividend yield 75% higher by investing in French stocks. The iShares MSCI France ETF ( EWQ ), a collection of the largest and most liquid French stocks, yields 3.3% at current prices. Let’s take a look under the hood at EWQ’s holdings. Though not all of EWQ’s holding are readily available to U.S. investors as ADRs, all of the top-ten holdings are available either on the NYSE or over the counter. iShares MSCI France ETF Holdings U.S. Ticker Name Weight (%) Dividend Yield SNY SANOFI SA 9.2% 3.9% TOT TOTAL SA 8.7% 5.1% BNPQY BNP PARIBAS SA 4.8% 2.9% LVMUY LVMH MOET HENNESSY LOUIS VUITTON 4.0% 2.0% AIQUY AIR LIQUIDE SA 3.5% 2.2% LRLCY LOREAL SA 3.5% 1.7% AXAHY AXA SA 3.4% 3.8% SBGSY SCHNEIDER ELECTRIC SE 3.3% 2.7% DANOY DANONE SA 3.1% 2.5% EADSY AIRBUS GROUP NV 2.7% 1.4% At the top of the list we have French pharma giant Sanofi SA ( SNY ) . As a global pharmaceutical company—and as a defensive stock that benefits from aging demographics—Sanofi is relatively unaffected by what happens to the Eurozone economy. It also carries a very modest amount of debt, implying that the company could ride out any turbulence in the credit markets due to a Greek exit from the Eurozone. Sanofi also sports a nice dividend yield of 3.9%. Unfortunately, we probably can’t expect a lot of the way of dividend growth in Sanofi, as it pays out about 90% of its profits as dividends. The highest yielder among large-cap French stocks is oil major Total ( TOT ) . Total sports a 5.1% dividend yield, making it one of the higher-yielding global majors. As a point of reference, ExxonMobil Corporation ( XOM ) yields only 3.0%. Total, like most of its oil major peers, has made its dividend a top priority, and I consider its dividend safe for the foreseeable future. But with all oil majors slashing investment and divesting assets in this era of low oil prices, I wouldn’t expect aggressive dividend hikes any time soon. Still, a 5.1% dividend yield, even with no growth, is attractive in a market where the 10-year Treasury yields just 2.0%. Moving down the list, the next big-yielder would be insurance giant AXA SA ( AXAHY ), with a dividend yield of 3.8%. Does buying individual French stocks make sense? Well, it certainly could. If you’re bullish on energy stocks, as I am, then Total is certainly a strong contender. But the better option might be to simply buy EWQ and get an entire basket of French stocks. Using data from Research Affiliates, French stocks are priced to deliver vastly superior returns over the next decade. French stocks are priced to deliver real returns of 5.1% per year compared to just 0.4% per year in American stocks. It’s worth noting that French stocks are priced well below their median CAPE valuations and are priced at about half of American valuations. It’s also worth noting that France—yes FRANCE—just pushed through a package of significant economic reforms. It wasn’t easy, and French President Francois Hollande had to ram the reforms through over objections from parliament. But any improvement in the French attitude towards business and commerce is a major step in the right direction. If you’re looking for diversification away from expensive U.S. equities, investing in French stocks via EWQ is a solid option. Disclosures: No current positions. Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the  Sizem ore Insights blog. This article first appeared on Sizemore Insights as Oh là là! Looking for Dividend Yield? Explore France
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    Three Scenarios That Might Impact Chipotle Mexican Grill
  • By , 3/3/15
  • tags: CMG MCD QSR DNKN
  • Chipotle Mexican Grill (NYSE:CMG), the leader in the fast-casual segment, is one of the fastest growing restaurant brands in the U.S. The burrito maker has been able to attract customers and investors, with nearly 20% revenue growth every year for the last 5 years. Moreover, the company reported roughly 28% year-over-year (y-o-y) growth in net revenues and 16.8% growth in their comparable store sales in 2014, primarily driven by two key factors: an increase in the average check and an increase in customer visits. Chipotle’s business model is positioned somewhere between fast food restaurants and casual dining restaurants, providing counter service with customized, fresh, organic, and high quality food at slightly higher prices than the fast food chains. The new innovative concept attracted more traffic and as a result, the Mexican cuisine specialist was able to steal customer traffic from the top traditional fast food chains. We have a $673 price estimate for Chipotle, which is roughly the same as the current market price. See Our Complete Analysis For Chipotle Mexican Grill CMG’s stock rose from more than 25% from $531 to $667 in 2014, primarily due to strong financial results. Trefis’ estimate for the CMG stock price is $673, which is currently in-line with the market price. However, Trefis estimates the net revenues for the fiscal 2015 to be more than $5 billion, which is 6% above the general consensus. Taking the current market and industry trends, as well as probable future scenarios in mind, there are 3 catalytic factors that can impact the company’s stock price. Shift In Dining Habits In The U.S. Top quick service restaurants, such as McDonald’s (NYSE:MCD), Wendy’s, Yum! Brands, and Burger King (now Restaurant Brands International Inc), dominated the last decade in terms of customer traffic with its innovative new burgers, sandwiches, and other value meals. Moreover, the breakfast menu introduced by some of these chains attracted the morning working class group, adding to the customer count. These fast food chains provide low cost food and high speed service. There is no doubt that Americans love fast food, but the industry is facing its own challenges, ranging from rising food costs and increasing health concerns. Over the past few years, the U.S. restaurant industry has been witnessing a gradual trend shift in the customers’ food preferences. There have been increased concerns over the quality of food served in these quick service restaurants. Being labeled as junk food, these food items contain high quantity of fat, sugar, and oily additives that are believed to cause many health problems, including diabetes, obesity, and other heart and digestion problems. Consequently, a new concept of organic fast food service was introduced by the fast casual segment for people who not only need quick meal options, but also healthier alternatives. Chipotle Mexican Grill was one such food chain that was able to cater to the needs of the people. The company promises high quality and freshly prepared food to its customers with its ‘Food with Integrity’ campaign, that too gives reasonable prices and quick service. The Mexican cuisine concept took the industry by storm, as it delivered strong top-line growth at a time when the other  well-established brands were struggling. According to the  NPD ’s foodservice market research, the customer traffic growth in QSRs was considerably flat during the year ending June 2014, whereas the visits to fine dining restaurants rose 3% during the same period. Despite the flat overall customer traffic, Chipotle’s average annual number of visits per restaurant rose by 1.2% to 186,000. Trefis estimates the number to increase by 6% to 198,000 in 2015, and expects it to rise to 243,000 by the end of 2o21. If quick service restaurants, such as McDonald’s and Burger King, came up with organic alternatives at cheaper prices to attract customers in the next 2-3 years, we might see only a 4% increase in the average visits per restaurant to 194,000 in 2015, and there will be 3% downside ($652) to our price estimate. Food Prices Chipotle mostly requires meat products, such as pork, chicken, and beef, to prepare its food items. Last year, the company witnessed an increase in prices of all the meat products, due to several reasons. According to the USDA, retail prices of Ground beef rose nearly 22% and that of pork and hams rose 15% in 2014. Apart from this, prices of dairy products rose slightly during the last year. As a result, the food and beverage expenses were 34.6% of the revenues, highest in the last 5 years. To counter this, the company was forced to raise the prices of its steak burritos by 4%-6%, or 32-48 cents, whereas the overall menu prices went up by 6.5% on average. This offset the increase in expenses and resulted in an increase in average check for the company. According to Trefis estimates, average spend per visit rose 12.4% to $13.05 in 2014. According to the United Stated Department of Agriculture (USDA), meat prices will likely rise further in 2015, due to the Texas/Oklahoma drought and Porcine Epidemic Diarrhea virus (PEDv). Moreover, further disturbances in weather situations in those regions might drive up food prices. Trefis estimates the average check to rise 6% in 2015 to $13.83, and to reach above $16 by the end of our forecast period. On the other hand, food expenses are estimated to increase to 35.8% of the revenues in 2015. If meat prices rise more than the expectation, and food expenses reach 36.6% of the revenues in 2015, with nominal increase in the menu prices, we might see a 3.4% downside ($649) to our price estimates. However, if the menu prices are increased subsequently, so that the average check reaches $14.10 in 2015, the downside might reduce to 1.4% ($662). Store Expansions In 2014, Chipotle added 192 net new stores taking the total count to 1,783, including 1,755 Chipotle restaurants in the U.S. and 7 of them in Canada. The number of stores is still less than compared to that of McDonald’s and Burger King. Most of the Chipotle stores are located in California and New York, with a lot of scope for expansion in the less targeted areas. Moreover, outside the U.S., there are only 17 stores in Canada, France, U.K., and Germany. Chipotle can target international expansion, with high GDP countries in focus. Currently, the company plans to open 190 restaurants in 2015. Trefis estimates the company to open 190 stores in 2015 and to have a total of close to 3,100 stores by the end of our forecast period. If Chipotle aggressively expands in the next two to three years both domestically and internationally, with an average of 220 restaurants openings per year, we might see an increase in average visit per restaurant as well. This scenario will provide an 8% upside ($723) expansion to our price estimate. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Three Scenarios That Could Change Harley-Davidson As We Know It
  • By , 3/3/15
  • tags: HOG HMC TM
  • Harley-Davidson (NYSE:HOG) is an iconic heavyweight motorcycle maker, only one of two American motorcycle manufacturers to survive the Great Depression. The company also went through recession in the last decade, but has since recovered well. Wholesale motorcycle shipments have increased by approximately 30% since 2010 to over 270,000 units, although still lower than the peak of 2006 (350,000 unit sales). We remain optimistic about Harley’s future business growth, and have factored in the anticipated increase in demand in the U.S. amid strengthening macroeconomic conditions, and further expansion in international markets, which has taken our price estimate to 3% above the current market price. However, there are some scenarios — three in particular, which could somewhat alter Harley’s valuation. Our current price estimate for  Harley-Davidson stands at $67 . The stock fell 5.4% in the last three months. See our full analysis for Harley-Davidson Impact Of The New Plug-In Motorcycle- Harley-Davidson has remained committed to evolving with shifting market trends, and one such example is the company’s concept plug-in motorcycle dubbed LiveWire. The electric motorcycle wrapped up its demo tour in the U.S. last year, and is now moving to Canada, Europe, and Asia-Pacific to gauge customer response to the all-new Harley. The high-performance electric bike market is still in its nascent stages, and not much can be said about how huge this market could be, especially with the entry of Harley which already carries a strong brand name and could leverage its vast distribution channels and marketing muscle to grow. Fuel prices are low as of now, but once the prices pick up, coupled with the positive perception associated with environmentally-viable vehicles, electric motorcycles could be a huge market opportunity. Assuming this project takes off and LiveWire goes into production next year, we made certain changes to Harley’s U.S. and European market sizes and shares. The company’s current U.S. market share is at 55.5%, which could improve to almost 60% by 2021 (up from our current estimate of 58.6%), if the incremental sales of LiveWire are added. Market size will also swell as we will now consider a wider customer base, extending beyond the 600+ cc motorcycle segment, and including potential buyers of lighter weight electric bikes. By incorporating the new estimates, which could be further tampered with on the Trefis website, the price estimate for Harley jumps to over $68, with a 9.4% increase in the 2020 net income figure from our previous base estimates. Increase In Number Of Buyers Due To Outreach Program- With an aging population of middle-aged Caucasian males in the U.S., which traditionally formed the core customer base for Harley, the company has looked to put more emphasis on sales to outreach customers (comprising young adults, women, Hispanics, and African-Americans). For the third consecutive year in 2014, Harley grew sales to outreach customers by more than twice the sales-growth to core customers, which however still form a bulk of the company’s U.S. sales. Outreach sales are growing, and could grow at an even faster rate than previously predicted, fueled by the high estimated sales for the Street 500 and 750 in their first full year in 2015. These are lighter weight and cheaper Harleys, and make the motorcycle maker’s portfolio more attractive to the millennial and outreach customer. Assuming that the Street pair has a massive impact on Harley’s U.S. sales, the company’s heavyweight motorcycle market share could rise to 65% by the end of our forecast period. This figure might seem overly ambitious, as it is generally considered tough to improve share once its already in the high double-digit percents. However, the Street bikes could form as much as 8% of Harley’s net shipments this year alone, a bulk of which will be in the U.S., which is why market share could grow further. These motorcycles are also bringing-in customers new to the Harley brand, which essentially increases the market size too. The estimated impact of Harley’s outreach program could see the company’s valuation rise to $67.82 and earnings per share for 2015 to $4.38. Although the EPS estimate is only 13 cents above consensus estimates, this is because the outreach program will have a long-term bearing on the company’s sales, rather than an immediate impact on revenues and EPS this year. Possible Weak Demand For Luxury Bikes In Emerging Markets- One downside scenario for Harley-Davidson could be subdued demand in emerging markets, which are currently estimated to drive growth. We currently estimate the manufacturer’s rest of the world (excluding U.S. and Europe) sales to grow at a CAGR of 6.7% through the end of our forecast period to over 80,000 units. However, demand in developing nations and especially for luxury heavyweight motorcycles might not be the same as seen in the U.S. in the early 2000′s. Volatile macroeconomic conditions in certain nations such as Brazil, Russia, and Turkey could mold customer perception and dissuade them from lavish expenditures, which includes heavyweight motorcycles. China is also slowing, even though the GDP growth rate is above 7% as of now. On the other hand, Harley’s revenue in Japan, which is its largest international market, declined 10% last year on flat volumes and negative currency translations, and the market could continue to stagnate in terms of volume growth. The future might not be as bright as first thought for the company in international markets. If we consider this hypothetical situation and forecast international sales to rise only at a CAGR of 2.3% over our forecast period, there could be a 4% downside to our current estimate of profits for Harley in 2020. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Has SAP Bet The House With The Biggest Update to its ERP in Two Decades?
  • By , 3/3/15
  • tags: SAP ORCL MSFT IBM
  • SAP SE (NYSE: SAP) recently released the biggest update to its Enterprise Resource Planning (ERP) platform in over two decades. SAP claims that its latest release, named SAP S/4HANA, redefines the way its ERP works by introducing in-memory simplifications that will drastically improve speed and performance. The new platform will be offered in on-premise, as well as  software-as-a-service (i.e., Cloud) and hybrid variants. The company has also decided to continue simultaneous support and updates for the original SAP HANA Business Suite through 2025. The most notable update in SAP S/4HANA is that while the existing SAP HANA Business Suite runs on third-party databases like those offered by Oracle (NYSE: ORCL) and Microsoft (NYSE: MSFT), the new app suite and platform will run on HANA itself, an In-Memory technology where the entire data set is loaded and searchable in Random Access Memory. This will eliminate all interim steps like aggregates, indexes and other data redundancies that take up significant storage space and processing cycles in conventional database computing, thereby leading to much faster processing. The notoriously outdated SAP HANA user interface has also been revamped with the new ‘Fiori’ interface, which is designed to run seamlessly on mobile devices. In this report, we take a look at SAP’s latest product and why this is a crucial turning point for the company. We have a price estimate of $78 for SAP, which is around 10% higher than its current market price. See our complete analysis of SAP SE here Doing Away With Third Party Databases As mentioned earlier, the functionalities offered by SAP’s current ERP systems currently work on third-party databases like those offered by Oracle and Microsoft. SAP S/4HANA represents a massive change, because ERP systems based on the new platform will function on HANA alone. This removes the need to store interim steps like aggregates, indexes and materialized views on synced spinning disk drives, thus speeding processing. Now, thanks to in-memory calculation of virtual views, users will be able to preview what-if scenarios for major strategic, organizational and reporting changes almost in real time. SAP claims the magnitude of improvement in transaction performance from this update may be as much as 3x to 7x; the data storage footprint of an ERP-system may improve by a factor of 10. Unanswered Questions, Unclear Roadmap The immediate aftermath of the release announcement raised numerous questions regarding the transition from SAP HANA to SAP S/4HANA. For instance, SAP has clarified that its public cloud apps like SuccessFactors and Ariba will be integrated with and expanded in S/4HANA. However, it is unclear how the integration will take place in private-cloud or on-premises deployments. Perhaps more importantly, the company has remained vague regarding the roadmap and timeline for making the new offering production ready. Further, the S/4HANA Public Cloud offering for a number of functions will be released later this month. However, while the Public Cloud is configurable, it remains unclear how and when support for company-specific customizations and legacy interfaces in the Private Cloud will take place. Lastly, SAP has not yet provided detailed pricing information for the S/4HANA platform, and subscription cost for the cloud model has not been released at all. Further, SAP has a tendency to not provide itemized bills, which frequently holds back customers from upgrades. This factor will become all the more important if the company choses to provide separate add-ons for industry-specific functions, for which price clarity will be essential. Thus, we believe that pricing, especially in industry-specific private cloud models, will be a crucial factor if SAP is to successfully convince potential customers to switch from the comfort of familiar databases to SAP’s insofar untested offering. Has SAP Bet The House on S/4HANA? We believe that the success or failure of SAP S/4HANA rests not on the performance improvements, but on the quality and depth of industry-specific functionalities that the company will need to offer to support its latest product. It is pertinent to note here that SAP has previously stated that it does not have any major acquisitions planned in the near future. Therefore, its in-house development team faces an uphill battle in developing suitable replacements for the functionalities offered by Oracle and Microsoft. SAP S/4HANA has already spent two years under development and its release is touted as “the biggest update in 23 years, possibly in SAP’s history”. Given the level of resources that the company has dedicated to S/4HANA and the long way it still has to go before it becomes fully functional, it would seem that SAP is betting the house on SAP S/4HANA. SAP founder Hasso Plattner has gone so far as to admit that “If it doesn’t work, we’re dead. Flat out dead.” However, we believe that its decision to continue the SAP HANA Business Suite alongside the new version suggests that the company is hedging its bets. After all, full support and updates for the older suite for another decade doesn’t exactly spell “phasing out”, let alone “full transition”. If anything, it indicates SAP’s cognizance of the hurdles that it is going to face in getting users to move on from familiar, traditional databases like Oracle. Instead of pursuing a single, unified vision for the entire company, SAP has now forked its foreseeable future into two paths – the older SAP HANA and the new SAP S/4HANA. In other words, SAP may have a lot riding on S/4HANA, but it has not put all its eggs in one basket – yet. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    How Will Aruba Acquisition Impact HP's Stock?
  • By , 3/3/15
  • tags: HPQ
  • Hewlett-Packard (NYSE-HPQ) announced on Monday, March 2 nd that it was acquiring the wireless networking company Aruba (NASDAQ-ARUN) for $3 billion in equity value ($2.7 billion net of cash and debt). This translates into $24.67 per share for the company, a 1% discount to Aruba’s close price on Friday. This is the largest acquisition that HP has made since it acquired Autonomy for nearly $12 billion in 2011. Aruba Networks will be integrated into the proposed new HP Enterprise Company once HP completes the split of its PC and printer business from its corporate hardware, software and service business later this year. Aruba, based in Sunnyvale, California, is a leader in the wireless networking and makes Wi-Fi networking systems for shopping malls, corporate campuses, hotels and universities. The company had revenues of $729 million in fiscal 2014, and has reported compound annual revenue growth of 30 percent over the last five years as more people are using mobile devices at work, school and elsewhere. In this note, we explore the opportunity this deal offers HP in the Wireless LAN (WLAN) Market, which is currently dominated by Cisco. See our full analysis on HP The Global WLAN Market Wi-Fi networks market has taken off in the past five years as the rapid proliferation of wireless devices has impacted the number of users who go online. As a result, Wi-Fi has become a necessity in the work space as well as at home. This has translated into a high growth rate for the sales of Wi-Fi hardware equipment. According to IDC, the global wireless LAN market has been growing over the past few years. In Q3 2014, Cisco with about 48.3% share dominated the market. Aruba, with a market share of 11.5%, was a distant second. Despite the acquisition of Colubris in 2008 and 3Com in 2010, HP has not been able to capitalize on its wireless technology portfolios, and its market share has been a paltry 4.5%. From a geographic perspective, the enterprise WLAN market is witnessing robust growth in Latin America (with 27.3% year-over-year growth) and Europe, Middle East, and Africa (EMEA) (15.0% year over year) in 3Q14, while enterprise WLAN market in the Asia/Pacific region grew more modestly at 4.5% year over year. However, North America, which witnessed a decline in 2Q14, grew 7.5% year over year in 3Q14. Going forward, as companies are transforming their internal business processes and improving employee productivity through WLAN-enabled cloud and multimedia applications, enterprise WLAN demand is expected to increase. The transformation in Enterprise IT is further accentuated by  the adoption of cloud, mobility, big data analysis and social media that have increased both network density and the requirement for advanced Wi-Fi technologies such as 802.11ac. Furthermore, public-facing enterprises such as government agencies, malls, retailers, etc., are realizing the importance of improved customer engagement through the wireless access and are investing to install WLANs. These factors are leading to a robust stream of brownfield (network upgrades) and greenfield deployments. These deployments are not only affected by the increase in number of smart mobile devices that can be connected, but also by the increase in the number of wireless endpoints such as printers, scanners and beacons. We expect that these trends will continue to play out for the foreseeable future. The HP-Aruba Deal While Aruba is a leading provider of next-generation network access solutions for the mobile enterprise, HP’s legacy networking solutions business has not been doing well, and its market share in WLAN has shrunk to 4.5% in Q3CY14. Through this acquisition of Aruba, HP hopes to create a leading competitor in the $18 billion campus networking sector, so as to become a significant player in the fast growing WLAN market. Aruba has a highly regarded innovation engine and specialized sales, marketing and channel model, complementing HP’s leading networking business and go-to-market breadth. Under the deal, Aruba is to become part of the HP Networking business within HP’s Enterprise Group. The enterprise networking division posted $2.62 billion in revenues for FY14. HP could leverage its Helion services and Converged systems portfolio (servers, storage and networking) to bring new clients to the Aruba’s fold. Furthermore, HP can use its global exposure and presence in various industry verticals such as education, healthcare and financials to expand Aruba’s business globally. If the combined entity could capture 20% of the WLAN market, which is 5% more than the current combined shares of each, the wireless networking revenue for HP can increase by over 100%, due to the synergy offered by each business. As a result, the Networking division’s contribution to HP’s estimated stock price would increase to 10% and should lead to 12% upside to our current price estimate. The new combined organization will be led by Aruba’s Chief Executive Officer Dominic Orr, and Chief Strategy and Technology Officer, Keerti Melkote, reporting to Antonio Neri, leader of HP Enterprise Group. With this move, HP will be uniquely positioned to deliver both the innovation and global delivery and services offerings to meet customer needs worldwide. The transaction is expected to close in the second half of HP’s fiscal year 2015, subject to Aruba stockholder approval, regulatory approvals in the US and other countries as well as other customary closing conditions. We presently have a  $31.33 price estimate for HP, which is 10% below the current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    ANN Logo
    What Mexico Holds For Ann's LOFT
  • By , 3/3/15
  • tags: ANN ARO AEO GPS
  • Last year, women’s specialty retailer  Ann (NYSE:ANN) announced the opening of its first LOFT store in the second largest Latin American economy, Mexico. This was the retailer’s first venture in the country, which offers a huge pool of value and fashion conscious buyers. The company believes that its success in U.S. and Canada is an indicator that it can succeed in Mexico as well, if it targets the market properly. Given that LOFT is a relatively cheaper brand as compared to Ann Taylor, has a bigger casual apparel variety and encompasses a wider customer demographic, it was understandably the preferred brand for Mexico. Although we expect Ann’s management to talk about its debut performance in Mexico in its Q4 fiscal 2014 earnings call, we think it’s worthwhile to analyse LOFT’s long term prospects in the market. Mexico is the eleventh most populous country in the world and close to 60% of its population is in the 15-54 years age group, which is LOFT’s target market. The ‘middle class’ of the country is growing, which paints a pleasing picture for relatively expensive brands that are associated with a luxurious lifestyle. However, the market is getting competitive with a number of casual as well as luxury brands extending their reach in the country, and this can keep a check on LOFT’s growth. Our price estimate for ANN stands at $36.64, which is just ahead of the current market price.
    INTC Logo
    Intel Showcases New Mobile Technology At The 2015 Mobile World Congress
  • By , 3/3/15
  • tags: INTC AMD QCOM BRCM
  • At the ongoing 2015 Mobile World Congress in Bacelona, Spain,  Intel (NASDAQ:INTC) unveiled a series or new products and refreshes for its mobile processor and modem lineup, as well as new security software OEM deals and alliances with various telecom equipment vendors. The announcements made by the company include: -  Intel Atom x3 processor series (code-named SoFIA) - the company’s first integrated communications platform for low-cost tablets, phablets and smartphones. Combining 64-bit multi-core Intel Atom processors together with 3G or 4G LTE connectivity, the integrated communications Sytem-on-Chip (SoC) combines the applications processor, image sensor processor, graphics, audio, connectivity and power management components in a single system chipset. Intel claims that around twenty companies have committed to delivering its Atom x3 designs in the near future. - The  first 14nm Atom SoC – the Intel Atom x5 and x7 processor series (code-named Cherry Trail) for next-generation tablets  and small-screen convertible PCs. The processors will power a range of mainstream to premium devices. Acer, ASUS, Dell, HP, Lenovo and Toshiba have already committed to deliver devices on the Cherry Trail platform. - Intel also announced its  third-generation five-mode, LTE Advanced Category 10 modem, XMM 7360. The compact size and power efficiency enable the Intel XMM 7360 to accommodate a wide range of form factors, from smartphones and phablets to tablets and PCs. It also expands Intel’s portfolio of LTE solutions, giving device manufacturers a competitive option to quickly design and launch LTE devices in various market segments and geographies. - Brightstar Corp, Deutsche Telekom, LG Electronics, Prestigio and Samsung selected Intel’s Security technologies to help secure personal data. - Intel is partnering with Alcatel-Lucent, Ericsson, and Huawei on creating a variety of network management and radio network hardware running on (Intel-powered) servers. See our complete analysis for Intel Intel’s Expanding Presence In Mobile Can Spur Future Growth; Contra Revenue To Decline In The Future Despite significant decline in revenue and heavy operating losses from the segment (the mobile business reported an operating loss of $4.2 billion in 2014), Intel’s mobile business is showing considerable momentum. Although Intel’s Mobile and Communications Group revenue declined drastically last year, the company in fact  gained market share in the segment. Intel had set a target to ship 40 million tablets in 2014 but ended up shipping 46 million tablets, becoming one of the industries largest merchant silicon providers in tablets. For much of last year, the ramp up in its tablet volumes is being offset by an increase in contra revenue dollars — hence the decline in revenues. With contra revenue, Intel is paying tablet makers to cover the additional bill of materials (BOM) costs of switching from ARM-based processors. The goal was to establish Intel architecture in the marketplace and scale the supply chain and the chart developers. For 2015, Intel’s key goal is to improve its profitability in the mobile segment as the company believes that it has done a good job establishing itself as one of the top producers of silicon in tablets. As Intel’s SoFIA SoC ramps, it will progressively reduce the building material cost that have adversely affected the company’s gross margins in the mobile business. Intel believes that it will no longer have to pay the subsidies for the SoFIA products. The bill of materials cost for a Broxton tablet is estimated to be $20 less than for Bay Trail, and SoFIA, with its greater integration and smaller die size, is expected to cost even less. In sum, Intel is leveraging  its advance along the technology road-map to lower the price and eliminate the subsidy. Intel’s LTE technology, which was originally developed for phones, is becoming increasingly valuable in tablets and even PCs, as wireless wide area network connectivity becomes increasingly common. Intel estimates the rate of baseband attached to tablets will roughly double and that of PCs will rise to over 15% by 2018. We believe the above developments can help the company expand its footprint in the smartphone and tablet market. Intel targets to drive $800 million out of its mobile business in 2015. Our current price of $34 for Intel is in line with the current market price. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Zynga Through The Lens Of Porter's Five Forces
  • By , 3/3/15
  • tags: ZNGA EA FB
  • Zynga’s (NASDAQ:ZNGA) business  under-performed during 2014 owing to a drop in its user base, a surge in losses, and a lack of new major game launches. Its fourth quarterly results also came in disappointing, with weaker-than-expected sales growth and a soft outlook driving its share price over 15% lower since the earnings report. In this article, we stack up Zynga’s business against Porter’s Five Forces to assess where it could gain or lose going forward. We think the industry dynamics are clearly unfavorable for Zynga, as many of the Porter Five Forces indicate a high level of threat. Although already intense, the competitive rivalry within the industry could further intensify in the future due to the low barriers to entry in the mobile gaming business. Coupled with high bargaining power for customers as their expectations continue to magnify, we think these factors will put an upward pressure on development and customer acquisition costs over the coming years. Suppliers of traffic, including Facebook, Google and Apple, can impact Zynga’s business by changing their terms of service unilaterally. In addition, the sheer number of mobile apps that keep emerging every day  can threaten Zynga’s business, as they compete for the time and money spent by Internet users.
    BMY Logo
    Bristol-Myers Squibb's $1.6 Billion On New Drug Deals Is Well Spent
  • By , 3/3/15
  • tags: BMY MRK PFE
  • Bristol-Myers Squibb (NYSE:BMY) recently entered a couple of agreements worth $1.6 billion to bolster its immuno-oncology drugs portfolio. The first was its decision to acquire Flexus Biosciences, which is involved in the development of novel oncology drugs, for $1.25 billion. Out of this, $450 million is contingent upon Flexus achieving certain development milestones. With this acquisition, Bristol-Myers Squibb will get rights to Flexus’ top drug under development - F001287, as well as access to its IDO/TDO discovery program. IDO/TDO inhibiting drugs decrease the production of kynurenine, thus empowering the body’s immune system to target tumors with higher efficacy. The second deal is essentially a research collaboration with Rigel Pharmaceuticals. With this move, Bristol-Myers Squibb will gain development and marketing rights to Rigel’s TGF beta receptor kinase inhibitor pipeline. The crux is that the company is making some significant moves to expand in a market with strong growth potential. Cancer drugs have traditionally been much less effective as compared to drugs catering other therapeutic areas. Besides, there are numerous types and sub-types of cancer which warrant development of very specific drugs. These factors indicate that there is a huge untapped market provided R&D efforts result in novel and effective techniques. It makes sense for the company to invest in this area. Immuno-oncology, in particular, is where most of the funding is likely to go. Let’s take a look at how this market is expected to shape up. Our current price estimate for Bristol-Myers Squibb stands at $52.70, implying a discount of about 15% to the market.
    ANF Logo
    Abercrombie & Fitch Earnings Preview: Weak Portfolio And Traffic Decline Will Subdue Growth
  • By , 3/3/15
  • tags: ANF AEO ARO
  • Abercrombie & Fitch (NYSE:ANF) has been struggling for a long time now, initially due to its over reliance on logo merchandise and lately due to its strategy of aggressively phasing out basic logo products. Amid all of this, a consistent decline in foot traffic on account of the ongoing online shift has made things worse for the company. When the retailer comes out with its Q4 fiscal 2014 earnings on March 4th, we expect its results to be bogged down once again by the aforementioned factors. In fact, during its third quarter earnings call, Abercrombie slashed its full year EPS guidance to $1.52-$1.65 from its earlier outlook of $2.15-$2.35. This was an alarming revision and it confirmed that the company was itself unsure of its performance during the holiday quarter. Abercrombie’s fashion inventory remains limited and its portfolio has been weakened by the absence of logo merchandise. While the management believes that this strategy is necessary for the revival of its brand image, it is weighing heavily on Abercrombie’s overall results. During the third quarter of fiscal 2014, the company’s comparable sales fell a very sizable 10%, and it might report a similar figure yet again. Our price estimate for Abercrombie & Fitch stands at $37.30, which is about 50% above the current market price. See our complete analysis for Abercrombie & Fitch Weak Product Portfolio There was a time when Abercrombie’s logo on basic t-shirts and jeans was enough to attract customers, but it is no longer the case. Over the past two to three years, U.S. shoppers have shown great interest in fashion-forward products from Zara, Forever 21 and H&M, but little affinity towards logo branded basic products from Abercrombie. As a result, the company’s revenues have declined significantly, since it persistently relied on the logo business hoping that its iconic brand image would eventually bring customers back. However, given that U.S. buyers have shunned basic logo products altogether irrespective of the brand, Abercrombie decided to aggressively transition its portfolio from basic logo products to non-logo fashion products. Last year, in an earnings announcement, the management stated that they will reduce their logo business to “almost nothing” within 12 months and replace it with fashion-forward inventory. Although the change appears too drastic, we believe that this was a much needed step. However, this strategy has resulted in significant revenue decline so far and we believe this trend continued in the recently concluded quarter. Traffic Decline Over the past couple of years, there has been a notable decline in foot traffic across the retail and apparel industries, as shoppers increasingly have moved online. While this has boosted growth for pure play online players, retailers such as Abercrombie that rely on store sales for the bulk of their revenues have been on the receiving end. During the three month period ended January 31, foot traffic across the industry was down significantly, which likely contributed to Abercrombie’s comparable sales decline. During the holiday season, industry-wide foot traffic fell a sizable 8.3% year over year, according to data compiled by RetailNext. In the subsequent month, the foot traffic decline remained intense at 7.7%, implying that store based retailers such as Abercrombie had a tough time during the quarter. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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